Attracting investors with environmental risk disclosure

What motivates companies to reduce greenhouse gas emissions and other environmentally damaging activities, when it sometimes incurs an extra cost? Environmental groups often accuse companies of cynical ‘greenwashing’ in their environmental campaigns, and it’s true that large companies will go to some lengths to reduce accusations that they contribute to environmental damage, even if their responses don’t go much further than new marketing campaigns. However it’s increasingly also motivated by keeping shareholders happy, as well as the public.

‘Socially responsible investing’ has been around for years now, but shareholders seeking information about a company’s assessments of its impact on the environment are not always solely motivated by altruism: concerns about the bottom line impact are also growing.

Earlier this month, CERES, the sustainable investment network, published two studies showing that few large companies reveal much about their exposure to the effects climate change. “Climate change and other environmental and social issues pose bottom line risks, and investors have a right to know which businesses are best positioned to compete in the emerging low-carbon global economy,” says CERES’ president in the accompanying press release. CERES’ views are hardly insignificant – it counts large investors such as CalPERS, the Californian state pension fund, among its members.

The cost of carbon permits are factored into assessments of the electricity companies operating under Europe’s carbon emissions trading scheme, as demonstrated in last month’s downgrade of UK power company Drax by Standard and Poors.

The Carbon Disclosure Project is another example: it annually surveys 3,700 companies on behalf of institutional investors, and publishes the results in a searchable database (not all companies reply; last year it was about 1,550). Most of the questions concern how companies are managing their role in climate change, but the survey also includes disclosure on the risks companies face from climate change. Markit, a financial information company, will this summer launch an index based on the CDP results, and Joanna Lee of the CDP said, based on the feedback from the institutions involved with the project, it was likely to be of interest to investors seeking to minimise exposure to climate change risks, as well as those interested in socially responsible investing.

“There is an increasing market both from a retail and institutional perspective for products and exposure to companies who have a good environmental management strategies, and we’re certainly getting that msg from many of the institutional investors who are signatories to CDP,” Ms Lee said.

“Carbon pricing is an issue but physical risk is also an issue, and that for some (investors) is more material, depending on the sector.”

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